Dear Students & Readers,
Given the amount of inquiry I am receiving from our readers and students regarding the Coronavirus and the recent market volatility, I feel compelled to share my views on the situation, from a trading and investing perspective as well as a personal perspective.
I have produced this article in a question and answer format to best address the comments and concerns many of you have sent us over the past few weeks.
Q: Will the LTTTM business or service be interrupted by the Coronavirus situation?
I am self-isolating at home with my family, avoiding any outside contact. The rest of the LTTTM team are also working from home. In the unlikely event I or a team member becomes ill, we have a contingency plan in place to continue the LTTTM service. The show will go on, as it has done since we started back in 2008.
Q: What do I think about the Coronavirus situation overall and what am I doing?
As I write the US equity markets just crashed circa 13% overnight, the worst drop since the crash of 1987. The market is now down circa 30% so far this year. This has been the most volatile price action I have ever witnessed in all my years of trading.
Whether you believe the virus pandemic is going to eventuate into what the experts are predicting, it has now become an almost self-fulfilling market collapse. Traders and investor’s confusion start to dictate these volatile moves rather than facts and evidence. Unfortunately, now that the markets have caused this level of technical damage, we may remain in this state of chaos for some time until we see the world starting to show clear signs of exiting this viral and economic crisis.
I have members in Italy, South Korea, China, and other seriously impacted regions who have shared concerning stories of just how serious this virus situation is. From all my discussions with well-connected individuals as well as my own in-depth research online (non-main stream media), it is clear that this virus is very serious and poses a risk to certain people in the community, especially the older generation and those people with existing health conditions. Despite the massive dangers to a large segment of the population, the very fact the world is now so aware of the danger of this virus and with everybody preparing and bracing for the worst, the worldwide pandemic may come to an end faster than we all expected, touch wood.
It’s definitely not a time to panic and run for the bomb shelters, but it’s a time to be vigilant, to have a plan, and to protect ourselves and our loved ones from possible infection (especially our older folks who are most at risk).
At this stage, I have taken personal precautions including self-isolating myself and family from the outside world. I have stockpiled food to last months if needed (as I speak, the local stores are restricting purchases and shelves continue to remain almost empty). I have also asked my parents and older friends to self-isolate from all people including their own family. I have also suggested they have food delivered instead of going out to stores and risking infection. Most of my attempts to help my family and friends prepare for a potential worst-case scenario has fallen on deaf ears, so this has me a little concerned. People tend to believe it’s never going to happen to them, and ultimately we can’t control others, we can only really control what we do ourselves.
Q: Why are the markets acting so crazy and is everything going to be ok?
This is a true black swan.
The moves in the markets have been both extreme and unexpected. This is a true black swan (an unexpected and unpredictable event that was extremely difficult or impossible to predict), that is causing genuine chaos to the world’s financial markets and economies. The move has been exaggerated by people’s predictable panic and confusion, and like always, the computer algorithms (quants) are fueling the momentum behind many of these crazy daily movements in the markets.
The only thing to fear is ‘Fear’ itself
Most retail market participants actually believe the world is ending right now, the level of chaos in stocks and commodities especially is unprecedented. Due to the extreme price volatility, we know that typical trader and investor psychology will see many market participants panic and make decisions without even understanding what is truly happening. Some will inevitably be forced to sell due to margin calls or simply to raise capital to run their business during this slow economy.
The problem we have here is that panic and overreaction may indeed turn out to be the cause of another GFC as apposed to the Coronavirus crisis itself. Once you have the entire world fearful of owning financial assets and fearful of any form of travel or even leaving their house, you have a self-fulfilling crash in the global economy, regardless of the true cause. Fear and panic are the real danger to all of us here and not just virus pandemic itself.
Fed to the rescue ‘Again’
Just like we saw back in the 2008/2009 GFC, the US Federal Reserve has just announced ‘whatever it takes’ rescue measures to try and stem the bleeding in financial markets and credit markets. Countries around the world and central banks are all working together to try and stimulate their respective local economies and to help local businesses weather the current economic storm. Sadly these rescue tactics will not save every local business and certainly won’t save every listed company. There is going to be insolvency and bankruptcies as a result of the current crisis, and the global stock, credit, and currency markets are pricing this in already.
Capitalism will continue
History has shown that the Reserve banks and Governments won’t allow the markets or economy to collapse. They have rescued the world before and they will try to rescue it again, so we should remain optimistic. When the market finally wakes up to the idea that there is a rescue mission from the banks and government on the way, things will hopefully start to stabilize, just as they did back in 2008/2009 GFC and other crisis points in recent history.
It’s important we all understand that no matter what happens right now, this is not the ‘end of days’, this is not the ‘end of capitalism’ and things will continue normally right where they left off eventually. It’s important to stay optimistic because if you immerse yourself in negativity, you will 1. add to the problem and 2. miss the huge trading and investing opportunities upon us.
Q: Do I still think Trump will be re-elected in 2020?
Every since I predicted Trump would win the 2016 election and made 500% + returns on that bet/trade, people have been asking me about my thoughts on Trump winning in 2020. My view is that the pandemic will hopefully be over by the November US presidential election. As a master of spinning any and all events in his favor, Trump will take credit for saving lives through his response teams effort and bringing the crisis to a close. He will take credit for the V-shaped stock market recovery that will ultimately occur after the pandemic subsides, his buddies at the US Federal Reserve will make sure it happens. His existing supporters and new silent supporters will emerge in massive numbers and Trump will claim victory in November 2020 convincingly. There may be opportunities to back Trump above even money odds in the coming weeks/months ahead, and that’s worth keeping an eye on. I might write a post on this later in the year.
Q: How am I trading the current market conditions?
Look for opportunities in all places.
For myself and other experienced traders, there are amazing opportunities to trade the short term swings and trends across a range of markets. In recent weeks there have been a plethora of trade entry opportunities offering high risk-reward payoffs. We have seen amazing volatility in Gold, S&P 500, Crude Oil, and all Major FX Pairs, just to name a few.
The patient trader waits to trade the swings by watching for price action signals to identify the short term turning points OR they wait to trade the trends by watching for retracements to key levels and using price action signals to identify when the prevailing trend momentum will resume.
For investors, there are amazing opportunities to pick up long term investments in solid companies they have had on their investment shopping list. Professionals don’t panic in these situations, they are salivating at the opportunities to profit and they embrace these kinds of market conditions.
Give trades room to move, these are unusual times.
It’s important during this extreme volatility that traders give their trades room which means using a wider stop loss and an adjusted position size. As an example, whilst keeping the same $ at risk per trade, you may trade 1 lot instead of 2 lots. You may use a wider stop loss of 400 points instead of 200. Remember, wider stops don’t mean more risk if you reduce position size. Do the maths and watch your risk.
Use the crazy market conditions and newly found free time to learn and practice your craft.
If your like myself and intend to spend the next few weeks/months at home working or just laying low on weekends instead of going out to see friends and family, you should use this newly found free time to focus on your self-education, to study up on your trading approach and practicing your trading strategies in real-world conditions. There has never been a better time to immerse yourself in the markets, it’s an exciting time to learn and an exciting time to trade.
Like it or not, the privileged elite few control this world, and they have controlled it for a very long time. The financial markets are one mechanism they use to transfer wealth and to control the wealth. They won’t let the game won’t stop, the world will continue and companies and people will return to normal in the not too distant future. It has always been this way for the past few centuries since capitalism began and it’s not going to change any time soon. So stay optimistic and things will eventually return to normal and life will go on. In the meantime, try to make yourself some money and capitalize on the plentiful trading and investing opportunities upon us.
What do you think is really going on out there in the world and in the markets right now? What have you been trading or looking at trading? How are you planning for the next few weeks and months ahead? Talk to me by leaving your comments below and I will reply to every comment.
Stay safe and good trading,
Gold Coast, Australia
March 17th, 2020